Gapping up
In reaction to strong earnings/guidance:
- NA.
M&A news:
- BTE +2.6% (Baytex Energy Trust and Raging River Exploration to merge with combined enterprise value of $5 bln, .
Other news:
- PTCT +28.1% (presents prelim data for FIREFISH Program)
- CBPO +22.8% (CITIC Capital submits preliminary, non-binding letter proposing to acquire all of the outstanding share capital of the Issuer for $110 in cash per Ordinary Share)
- VSTM +17.2% (Presents new data for Duvelisib; demonstrates robust clinical activity in CLL)
- JD +7.1% (JD.com and Google (GOOG) announce strategic partnership, Google to invest $550 mln in JD at $40.58/share)
- GERN +6.8% (presents updated data from the ongoing original Part 1 of IMerge)
- DRYS +3.9% (files to withdraw Registration Statement on Form F-1 -- determined not to proceed with the spin-off)
- CYTK +2% (presents Phase 2 data for Reldesemtiv)
Analyst comments:
- FRO +3.8% (upgraded to Outperform from Market Perform at Wells Fargo)
- RF +0.5% (upgraded to Outperform from Sector Perform at RBC Capital Mkts)
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Early premarket gappers
Gapping up:
- CBPO +18.2%, JD +9.2%, GERN +7.5%, VSTM +4.3%, MBT +2.6%, QD +1.6%, PSTI +1.6%, TTM +1.4%, RF +0.5%
Gapping down:
- Z -3.4%, ALV -2.4%, EC -2.3%, SO -2.3%, TS -2.2%, HPE -2.2%, ABB -2.1%, SHPG -2%, LDOS -1.7%, STM -1.7%, GFI-1.6%, ERIC -1.5%, AU -1.3%, BHP -1.3%, MU -0.7
SKF could be on its way to selling Motion Technologies - report (translated)
17 JUN 2018
SKF, the Swedish industrial group, could soon sell its linear drive systems products operations, Motion Technologies, according toDagens Industri.
The Swedish business daily reported, citing unnamed sources, that Motion Technologies could fetch around SEK 3bn (EUR 296m). The source also said that Motion Technologies works out of seven factories which are all connected to SKF's other operations, so a plan regarding how to separate the company's operations from SKF is necessary.
An SKF spokesperson did not wish to comment on the matter. He also declined to comment on whether there are other businesses within SKF not considered core operations.
One source said that Motion Technologies has a turnover of around SEK 2.5bn (EUR 246m).
Chrono24 could float in future (translated)
18 JUN 2018
Chrono24, the German global marketplace for luxury watches, could float in the future, NZZ am Sonntag reported.
Chrono24 co-chief Tim Stracke told the Swiss weekly that Chrono24's private equity backer, the New York-based Insight Venture Partners, is not currently planning to exit. Stracke said the company could repurchase shares or sell a stake to another investor. He said he could also imagine selling a stake via an IPO.
Stracke said over EUR 1bn worth of goods were traded on the platform last year.
The original article was published today on page 37.
Goldman Co-Head Of Trading: I Am Worried The Market May "Break" And Not Snap Back
Several weeks ago, Goldman's Chief Markets Economist Charlie Himmelberg became the latest Wall Street strategist to admit the threat to the market posed by HFT. Picking up on our original warning from April 2009, the Goldman strategist warned that HFTs – due to their inability to process nuanced fundamental information - may trigger surprisingly large drops in liquidity that exacerbate price declines, and result in flash crashes.
Himmelberg highlighted the growing market share of HFT and algorithmic trading across all markets, and warned that the growing lack of traditional, human market-makers has made the market increasingly fragile.
He is, of course, correct as active traders will attest, if nothing else then by the collapse in market liquidity around critical, market-moving events when HFTs strategically “pull out” from the market, making price swings especially sharp and resulting in a spike in volatility as shown in the schematic below.
As we discussed in greater detail back in April, the relentless, and increasingly commoditized ascent of HFTs, as well as the change to market structure and topology in a post-Reg NMS world, prompted Himmelberg to conclude that we live in a world where the biggest threat is not market leverage, but periods of sudden, unexpected and acute losses of liquidity. Or, as he put it, “liquidity is the new leverage.” This is how he explained it:
That analogy is meant to invoke the potential unrecognized problems or imbalances that build up over the course of long expansions. Financial leverage was obviously the imbalance that built up during the pre-crisis period, but that has been contained in the current cycle. In this cycle, there have been dramatic shifts in the way that secondary markets source liquidity, but this market structure has not yet been stress-tested by a recession or major market event. I therefore see a risk that markets are paying too little attention to liquidity risk, much as they previously paid too little attention to the risks posed by excess leverage.
Furthermore, the fact that for the past decade global capital markets and risk assets have been constantly prodded higher courtesy of central bank liquidity injections, has exposed them to increasing instability not only at the micro level but at the macro: while virtually HFTs – and roughly 30% of all active asset managers (who were simply too young during the global financial crisis) have never encountered a market crash, the big test will be what happens, and how the market would react during the next crisis in which there is no “big picture” central bank intervention, to make “buying the dip” at the micro, HFT level, the correct response, even though so far aggressively purchasing the “crash” has been the correct response every single time…
… as volatility always inevitably tumbled, making selling vol one of the preferred “carry” strategies for numerous investors classes (ultimately leading to the historic VIX explosion of February 5 which blew up several of the most popular retail vol-selling strategies such as inverse VIX ETNs in a matter of minutes).
But what if what HFTs do is nothing really new: what if the liquidity collapse that results in such flash crashes as the May 2010 US “Flash Crash”, the October 2014 10Y Treasury “Flash Rally”, the October 2016 Pound Sterling “Flash Event” and the February 2018 VIX Spike, are merely an accelerated version of events that took place repeatedly in market history, if only on a much more accelerated timeframe?
That is the point made by Brian Levine, Goldman’s co-head of Global Equities Trading, who in a recent “Top of Mind” interview with Goldman’s Allison Nathan. When asked if he is “concerned that HFTs cause or exacerbate flash crashes by reducing liquidity”, Levine’s response was oddly sanguine for a man who oversees one of the world’s most active trading desks.
Noting that “scarce liquidity in volatile markets is nothing new”, Levine counters that the risk of HFTs causing or exacerbating flash crashes by reducing liquidity is “overstated” and notes that while we may live in a time of “HFT stop” when market depth suddenly evaporates, “in the days of manual markets, market makers just didn’t answer their phones.”
For example, in the ’87 crash, people were really crowded on one side of the trade and all ran for the exit at the same time. This isn’t much different than a hypothetical scenario today in which systematic strategies all try to exit a position at once. It might happen within a few seconds instead of the 20 minutes it took for someone to answer the phone.
Furthermore, Levine sees an almost beneficial role played by HFTs who help the “market readjusts quickly today.”
Not everyone agrees. Many investors feel uncomfortable with a stock falling to 70 from 80 in a very short period of time. But I don’t think there’s anything inherently wrong with that. Bottom line, I don’t blame HFTs for flash crashes. In the grand scheme of things, these players do little to improve or worsen the situation. Remember, they generally end the day flat—they’re not taking much market risk.
And while that is correct, the wild market swings created by HFTs can and often do prompt those who are increasingly on edge about market structure, stability and asset overvaluation – here the culprit is as much the Fed as HFTs due to the injection of $20 trillion in liquidity by the world’s central banks over the past decade – to commence liquidating assets, resulting in a selling cascade, one which becomes self-reinforcing and ultimately results in a crash, even if so far every such crash has been bought up either by HFTs or central banks, whether directly or through jawboning - everyone remembers St Louis Fed president James Bullard explicitly hinting at QE4 during the market’s sharp correction in October 2014 which unleashed a furious buying spree and halted the selloff.
But while Levine may not be too worried about the HFTs’ role in creating and propagating flash crashes, there is one aspect of that the current broken market structure that does keep him up at night. As he admits in the interview, “what’s more worrisome to me is a real flash crash, which I define as a situation when the market “breaks.”
Indeed, the market breaking is surely high on the list of every trader’s worst nightmares, and reminds us of what we predicted several years ago, namely that when the “big one” finally hits for whatever reason, there won’t be a 20%, 30%, 40% or more drop in seconds. The market will simply be halted indefinitely (see “How the market is like SYNC which was halted indefinitely”).
This is how Levine describes his own trading nightmare, the one in which the crash is not a “flash” and the market simply breaks:
The data is wrong, everything trades at dislocated prices relative to the NBBO, and everyone—justifiably—widens their spreads. That happens almost every time there’s volatility, largely because message traffic increases dramatically. This is due to the fact that the opportunity set is greater and there’s no economic disincentive for sending messages to the market, so more electronic orders come in. This slows the system, widening spreads and generating price dislocations, which triggers even more orders and compounds the delays—a predicament that is only further exacerbated by the fragmentation of the equity markets. As this happens, stocks may trade outside of the NBBO briefly in millisecond or microsecond increments, constituting what I consider a genuine flash crash. All of this becomes a negative feedback loop that causes more volatility.Interestingly, if you define a flash crash by the percentage of executions that took place outside the NBBO, one of the largest ones occurred in 2008 after the first TARP bill failed, according to internal analysis we did a few years ago. And the market didn’t snap back, with the SPX closing down 10% on the day and on its lows. I think that may have been why there wasn’t talk of a “flash crash” afterward, but clearly the market structurally failed pretty badly that day, too. This suggests to me that, in a situation with actual bad news, the current US market structure may not be able to handle it, and there could be a downward spiral.
In other words, there will come a day “with actual bad news” when the selling onslaught is so broad, not even BTFD HFTs will be able to resist the sudden avalanche of selling. That’s the day when the increasingly fragile market, one in which “liquidity is the new leverage” will officially break and stocks will “trade outside of the NBBO constituting a genuine flash crash” in a “negative feedback loop that causes more volatility.” A selloff from which there will be no “snap back.”
Of course, here skeptics have a quick counter to this worst case scenario: how come it has never happened yet? The answer is simple: so far, every time the market crashed, central banks stepped in (as Bank of America recently showed).
And, more ominously, as of this moment - for the first time in the past decade - central banks, that ultimate backstop of every market crash, are once again draining liquidity…
... which, as we and Deutsche Bank explained previously, together with central bank tightening has been the catalyst for every major “market event”, whether economic recession or market crash or both in the post-Fed era.
"The Global Bond Curve Just Inverted": Why JPM Thinks A Market Crash May Be Imminent
At the beginning of April, JPMorgan's Nikolaos Panigirtzoglou pointed out something unexpected: in a time when everyone was stressing out over the upcoming inversion in the Treasury yield curve, the JPM analyst showed that the forward curve for the 1-month US OIS rate, a proxy for the Fed policy rate, had already inverted after the two-year forward point. In other words, while cash instruments had yet to officially invert, the market had already priced this move in.
One way of visualizing this inversion was by charting the front end between the 2-year and 3-year forward points of the 1-month OIS. Here, as JPM showed two months ago, a curve inversion had arisen for the first time during the first week of January, but it only lasted for two days at the time and the curve re-steepened significantly in the beginning of April.
Fast forward to today when in a follow up note, Panigirtzoglou highlights that this inversion has gotten worse over the past week following Wednesday's hawkish FOMC meeting. As shown in the chart below which updates the 1-month OIS rate, the difference between the 3-year and the 2-year forward points has worsened, falling to a new low for the year of -5bp.
But in an unexpected development - because as a reminder we already knew that the market had priced in an inversion in the short-end of the curve - something remarkable happened last week: the entire global bond curve just inverted for the first time since just before the financial crisis erupted.
As JPM notes, while the Fed's hawkish move was sufficient to invert the short end further, it was not the only central bank inducing flattening this past week: the ECB also pressed lower on the curve via its "dovish QE end" policy meeting this week. And as a result of this week’s broad-based flattening, the yield curve inversion has spilled over to the long end of the global government bond yield curve also.
In particular, the yield spread between the 7-10 year minus the 1-3 year maturity buckets of our global government bond index (JPM GBI Broad bond index) shifted to negative territory this week for the first time since 2007. This can be seen in Figure 2.
But how is it possible that the global government bond yield curve can be inverted when most developed 2s10s cash curves are still at least a little steep? After all, as seen below, After all, the flattest 2s10s government yield curve is in Japan at +17bp and although the 2s10s US government curve - shown below - has been collapsing, it is still 35bp away from inversion.
The answer is in the unequal weighing of US duration in the JPM global bond index: specifically, as Panigirtzoglou explains, the US has a much higher weight in the 1-3 year bucket, around 50%, than in the 7-10 year bucket, where it has a weight of only 25%.
This is because in terms of the relative stocks of government bonds globally, there are a lot more short-dated US government bonds relative to longer-dated ones as the US has lagged other countries in terms of the duration expansion trend that took place over the past ten years.This is shown in Figure 3 which shows the average duration of various countries’ government bond indices over time. It is very clear that the US has failed to follow other countries in the past decade’s duration expansion race and as a result there are currently a lot more non-US government bonds in longer-dated buckets which are typically lower yielding than the US. And a lot more US government bonds in short-dated buckets which are typically higher yielding.
What are the practical implications? Well, in a word, global investors - those for whom Treasury flows are fungible and have exposure to the entire world's "safe securities" - now find themselves in inversion.
In other words, with the Fed having pushed the yield on short dated 1-3 year US government bonds to above 2.5%, global bond investors who, by construction, hold more US government bonds in the 1-3 year bucket and more non-US government bonds in the longer-dated buckets, finds themselves with a situation where extending maturities at a global level provides no extra yield compensation.
And the punchline:
This means that while at the local level bond investors are still demanding a premium for longer-dated bonds, at an aggregate level – abstracting from segmentation and currency hedging issues – bond investors globally are no longer demanding such a premium.
Needless to say, although JPM says it anyway, "this is rather unusual as can be seen in Figure 2."
As for the timing, well it's troubling to say the least: it did so just before the last two bubbles burst. In fact, the last time the 7-10y minus 1-3y yield spread of JPM's GBI Broad bond index turned negative was in 2007 ahead of an equity correction and recession at the time. Before then it had turned very negative in late 1990s also, after the 1997/1998 EM crisis but also in 1999 ahead of a burst in the equity bubble and a reversal of Fed policy.
And if that wasn't enough, here are some especially ominous parting thoughts from the JPM strategist:
In other words, in normal times, bond investors demand a premium to hold longer-dated bonds and to tie their money for a long period of time vs. investing in lower risk short-dated bonds. But when investors have little confidence in the trajectory of the economy or they think monetary policy tightening is overdone or they see a high risk of a correction in risky markets such as equities, they may prefer to buy longer-dated government bonds as a hedge even though they receive a lower yield than short-dated bonds. This is perhaps why empirical literature found that the slope of the yield curve is such a good predictor of economic slowdowns and/or equity market corrections.
In other words, contrary to all those awed but naive interpretations of the short-term market reaction invoked by Powell or Draghi, according to the market, not only the Fed but the ECB engaged in consecutive policy mistakes. And, as JPM confirms, "this week’s central bank meetings exacerbated this flattening trend."
As a result the yield curve inversion is no longer confined to the front-end of the US curve, but has also emerged at the longer end of the global government bond yield curve.
What this means is that a decade after the last such inversion, bond investors globally no longer require extra premium for holding longer-dated bonds vs short-dated bonds, something that happens rarely, e.g. when investors have little confidence in the trajectory of the economy, or they think monetary policy tightening is overdone or they see a high risk of a correction in risky markets such as equities.
>>> Up
* AB Foods Upgraded to Outperform at RBC; PT 31 Pounds
* Aeroports de Paris Upgraded to Outperform at Raymond James
* ABN Amro GDRs Upgraded to Outperform at MainFirst; PT 29 Euros
* Cobham Upgraded to Overweight at Morgan Stanley
* Enav Upgraded to Overweight at Barclays; PT 4.85 Euros
>>> Down
* Disney Downgraded to Sell at Pivotal; Price Target $93
* Pernod Ricard Downgraded to Underperform at RBC
* Robit Downgraded to Hold at SEB Equities; PT 5.50 Euros
>>> Initiation
* Aareal Bank Rated New Buy at Citi
* SafeCharge Rated New Buy at Jefferies; PT 4.50 Pounds
>>> Call